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Earnings, medical loss ratios, and the possession construction of Medicare Benefit plans


There may be an excessive amount of controversy and uncertainty relating to earnings within the Medicare Benefit (MA) program. Curiosity in these points is rising because the share of beneficiaries grows. The Medicare Cost Advisory Fee, or MedPAC, just lately reported that MA enrollment grew 10% from July 2020 to July 2021. This implies MA accounted for 46% of all Medicare beneficiaries in 2021, with funds to MA plans totaling $350 billion. A current seen alternate of details and interpretations of some information by Berwick and Gilfillan, HalvorsonCrane, and Ginsburg and Lieberman has highlighted how incomplete current information are and the way that limits the power to reach at conclusions about market efficiency. The controversy is concentrated on whether or not MA plans are “overpaid” and the diploma to which present regulatory preparations are more likely to constrain potential overpayments. The priority is that MedPAC stories that MA plans proceed to be paid 104% of conventional Medicare Payment for Service (FFS) prices, and cost benchmarks stay at 108% of conventional Medicare FFS spending. Since 2010 and the enactment of the Inexpensive Care Act (ACA), Medicare Half C or MA coverage has aimed to enhance alignment of plan prices and funds, partly by requiring that well being plans in MA attain a Medical Loss Ratio (the share of premiums spent on medical care) of 0.85.[1] The ACA additionally lowered some funds to MA plans. Collectively these coverage adjustments sought to cut back overpayments that had been beforehand documented. On the time, the Congressional Finances Workplace (CBO) and the Medicare actuary predicted giant scale exit from MA markets. The precise expertise has been fairly completely different with robust market entry, and Safety Trade Fee (SEC) filings and earnings stories counsel that MA was the supply of earnings development for a number of giant insurers (e.g., UnitedHealthcare, Humana). MA is now projected to enroll 50% of Medicare beneficiaries by 2025 or sooner.

The MA cost construction permits for a number of methods for plans to earn earnings. MA plans are paid primarily based on annual premium bids made towards a market benchmark that’s set administratively by the Facilities for Medicare and Medicaid Companies (CMS) underneath statutory authority and relies upon partly on the standard ranking achieved by a plan. That bid serves to ascertain plan revenues. The distinction between these revenues and incurred prices are plan earnings. A portion of the distinction between plan bids and the market benchmark is returned to the plan within the type of a “rebate” (or a type of shared financial savings). That rebate have to be used to supply further advantages to beneficiaries that may entail lowered value sharing, decrease premiums, or supplemental advantages like imaginative and prescient, listening to, and dental providers. The projected premium for the supplemental profit related to the rebate is predicated on an actuarial estimate, and thus variations between the projected premium and precise prices are earnings. The Medical Loss Ratio (MLR) necessities for MA plans require that the distinction between revenues and medical prices can’t exceed 15% of whole revenues. As well as, optionally available supplemental advantages (distinct from the necessary supplemental advantages related to rebates) might be supplied by MA plans at a value to beneficiaries. Roughly 38% of plans supply such advantages. A plan’s margin for these optionally available supplemental advantages have to be lower than 15% of premiums. The plan’s margin plus the executive prices of the profit have to be lower than 30% of the premium.

MedPAC stories MA plan margins have been roughly 5% in 2019, and these various significantly by plan kind (e.g., Particular Wants Plans) and plan possession. MedPAC and others have famous that bids are more and more low with 87% of bids coming in at lower than conventional Medicare FFS spending; but plan funds stay at about 104% of conventional Medicare spending. Interpretation of those stories is difficult. Internet working revenue margins of 5% are nicely underneath the typical throughout industries. In contemplating these figures you will need to acknowledge that the entire income per enrollee represents a considerably increased base than that present in business insurance coverage, and that these revenues consist largely of taxpayer {dollars}. Margins generally is a deceptive indicator of profitability, particularly in excessive quantity industries. For instance, UnitedHealth Group enrolled almost 7.3 million individuals. As well as, assessing different commonplace monetary efficiency ratios might be troublesome since a lot of the giant insurers that take part within the MA program promote to a number of insurance coverage markets and personal quite a lot of associated and unrelated companies. Thus, allocating property to strains of companies to calculate different markers of economic efficiency resembling returns on property (ROA), in lots of instances, requires considerably arbitrary assumptions or information that aren’t publicly obtainable.

On this paper, we look at sources of earnings and earnings by MA plans. We give attention to potential sources of earnings, the measurement challenges in monitoring profitability, and the position that MLR rules have in constraining the potential for overpayments. Whereas we acknowledge funding earnings generally is a important supply of earnings, we don’t give attention to that supply on this evaluation. We give attention to dad or mum firms and never particular person plans. We illustrate our factors by interesting to a mix of program large info on gross earnings and margins, and case research the place extra full info is out there. Particularly, we illustrate a few of our factors utilizing examples from SEC 10-Okay and IRS Type 990 filings from Humana and Kaiser, two giant MA plan dad or mum firms. We complement their publicly reported monetary efficiency metrics with our personal calculations of MA plan efficiency utilizing information from Mark Farrah Associates. We spotlight the variations between the generally reported margin estimates of profitability and ROA. We additionally clarify the restricted means to calculate ROA.

Whereas we acknowledge the significance of coding as a supply of “overpayments” in MA, our focus might be largely on different dimensions of potential earnings which have acquired much less consideration. It is because the potential for some overpayments because of upcoding has been nicely established by MedPAC and Jacobs and Kronick. Nonetheless, acquiring a exact estimate of overpayments that distinguishes official coding from “upcoding” is difficult. To this point, inferences about “upcoding” have been made by evaluating the diagnoses reported in conventional Medicare claims to these reported by MA plans. Separating official from illegitimate codes via this methodology is troublesome. Some proof reported in authorized actions and investigations of chart assessment processes are higher positioned to uncover such variations however haven’t been utilized on a scientific foundation throughout this system.

The ACA reforms to Medicare Benefit and makes an attempt to cut back overpayments

The ACA contained a number of provisions that affected funds to MA plans. The ACA initially froze the extent of the benchmark towards which MA plans bid at 2010 ranges. Then, in 2012, the federal government started decreasing the benchmark to MA plans to extra carefully align them with the price of offering Medicare Half A and B providers in conventional Medicare. Efforts have been additionally made to take account of geographic variation in spending by adjusting cost in line with the quartile of the spending distribution an space falls into. The ACA additionally imposed an MLR requirement of 0.85 to enhance alignment of plan “prices” and funds. If a plan’s MLR was repeatedly decrease than 0.85, a plan may very well be topic to sanctions. The alternate between Berwick and Gilfillan, and Halvorson differed partly on the potential for overpayments primarily based on the effectiveness of the MLR necessities. Halvorson argued that the MLR was binding, whereas Berwick and Gilfillan, and Ginsburg and Lieberman expressed skepticism in regards to the energy of MLR to constrain overpayments.

A wide range of issues have been raised relating to the diploma to which MLR guidelines constrain earnings—these are linked to both the disguise of earnings as prices or to prices from plan purchases from associated companies producing earnings to the dad or mum firm that aren’t topic to MLR rules. As famous earlier, the priority about earnings disguised as prices has most continuously been made with respect to “threat adjustment” coding. Lately, the Inspector Common of the Division of Well being and Human Companies raised particular issues about coding practices, suggesting important sums have been concerned. We is not going to supply further dialogue on this concern as a result of beforehand talked about difficulties in making inferences about inappropriate coding.

MA can present supplemental advantages that aren’t coated underneath conventional Medicare. Examples embody imaginative and prescient care providers, dental care, listening to exams and aids, and wellness applications. The prices of offering these further advantages are generally paid for utilizing “rebate” {dollars} that stem from the distinction between the premium bid and the benchmark value in a market established by Medicare. These advantages and revenue margins are included as a part of the calculation made as a part of the MLR evaluation. The margins from supplemental advantages paid via rebates additionally contribute to earnings and the general MLR calculation. The small print of utilization and spending related to these supplemental advantages aren’t nicely understood as the information on these parameters aren’t made public. Rebates account for about 15% of MA funds.

The businesses which have the most important MA enrollments are giant medical health insurance carriers: United, Humana, and Kaiser. In 2021, about 67% of enrollment in MA was accounted for by 5 giant insurers: United, Humana, CVS/Aetna, Kaiser, and Anthem. These corporations usually have a couple of associated companies that present a minimum of some providers to their MA plans. For instance, Humana owns a part of “Kindred at Residence,” a house well being and hospice supplier. Likewise, Kaiser owns Kaiser Basis Hospitals and the Permanente Medical Teams that every one contract with Kaiser MA plans. CVS/Aetna, United, and Cigna all personal PBMs that contract with their MA plans. Different companies embody doctor practices, pharmacies, ambulances, and dental, imaginative and prescient, and listening to providers suppliers.

The final concern regarding associated companies is that the earnings earned by the associated companies aren’t topic to any MLR necessities. Which means there may be the chance that what seems as prices to the MA plan are partly earnings to the dad or mum firm that circulate via the associated enterprise. Within the part that follows we summarize what is understood about gross earnings and margins to the dad or mum firms sponsoring MA plans, a case research of the connection between margins and ROA, and a case highlighting the potential position of associated companies or when providers are carved out (as behavioral well being providers typically are).

Prices and Earnings in MA

Profitability, as measured underneath a particular definition of gross margins,  are reported commonly by MedPAC. Margins measure the power of corporations to earn earnings taking account of manufacturing, mounted prices, and depreciation. It doesn’t nonetheless, replicate the return on invested capital, which is an indicator that informs whether or not the funding within the agency represents a superb use of capital relative to different market alternatives. Under we report gross earnings and gross margins for MA plans aggregated to the extent of the dad or mum firm that sponsors the plans. We place the reported MA margins into context by reporting margins for the Commonplace and Poor’s 500 (S&P 500). The return on property (ROA) is one measure of the return to capital. This measure estimates the earnings that an organization generates for each greenback of property held. For multi-product corporations that promote throughout enterprise strains just like the 5 largest MA insurers, this requires making asset allocation assumptions which might be considerably arbitrary and require detailed inside information from corporations. These limitations imply that, for probably the most half, we can’t report ROA statistics for MA plans on the dad or mum firm degree. Nonetheless, as a result of Humana is taken into account a “pure play in Medicare Benefit,” we are going to evaluate the margins and the ROA for that firm as an illustration.

We use information from quite a lot of sources to tell our evaluation of MA plan efficiency. Publicly traded firms are required to file a 10-Okay report with the SEC every year, which incorporates detailed monetary statements in addition to different related feedback and information on the efficiency of various strains of enterprise. The IRS Type 990 is the equal report for tax-exempt organizations. Utilizing these paperwork for Humana and Kaiser, respectively, we are able to get hold of high-level monetary efficiency info and a few particular details about the efficiency of MA plans.

To complement these information and acquire a extra granular understanding of the revenue streams for plans owned by these firms, we use information from the Mark Farrah Associates’ (MFA) Well being Protection Portal. Most MA plan issuers are required to file a sequence of economic statements to the Nationwide Affiliation of Insurance coverage Commissioners (NAIC).[2] This features a supplemental exhibit which requires the issuer to submit info on the efficiency of every of their enterprise segments, separating between business, MA, Medicaid, and different insurance coverage merchandise.[3] These information embody detailed income and expenditure info on the plan and dad or mum degree.

We then use the MFA-cleaned model of the supplemental exhibit to calculate plan earnings and margins for 2018 and 2019. Then, we complement that plan-level information with CMS Medicare Benefit/Half D Contract and Enrollment Knowledge to determine the dad or mum firm of every plan inside the dataset. Our ultimate calculations of earnings and margins are rolled as much as the dad or mum/12 months degree.

Overview of Margins and Gross Earnings

Gross earnings and margins for the MA enterprise of program dad or mum firms are reported in Desk 1. We report common gross earnings weighted by enrollment for 3 units of dad or mum firms: all firms, the dad or mum firms with the ten largest enrollments, and what we confer with because the “large 5” (United, Humana, CVS/Aetna, Kaiser, and Anthem).

Table 1


Placing the margins reported in Desk 1 into context, we contemplate the typical margins throughout the broader market after which particular trade averages for 2019. The common working margin for all industries and corporations was about 11% in 2019. These margins various significantly throughout industries. For instance, meals wholesalers had margins of two.7%, oil and fuel manufacturing 19.9%, info providers 28.3%, and laptop providers 7.6%. Seen on this means MA profitability doesn’t stand out amongst U.S. industries. But as we famous earlier, margins give solely a partial image of profitability. Nonetheless, as a result of we can’t make sufficient estimates of a special view within the type of ROA for MA dad or mum firms broadly, we spotlight how margins and ROA might comprise completely different info which will enable for a extra full perspective.

Humana as a case instance

In 2019, Humana had the second largest share of MA enrollees with 18%, or about 4 million individuals, behind solely UnitedHealthcare. MA accounts for about 82% of Humana revenues. It is for that reason it’s thought of a “pure play” in MA. Based mostly on the information extracted from SEC 2019 Type 10-Okay filings and information primarily based on Humana’s NAIC filings, we estimate margins in a few methods. The best estimate takes the “pure play” remark actually utilizing Humana’s whole revenues and whole bills from the SEC filings. We use the reported gross earnings of $3.19 billion and whole revenues of $64.9 billion to acquire an working margin of 4.9%.  Utilizing whole gross earnings utilized to Humana property of $29.1 billion, we estimate an ROA of 11.0%. Utilizing the NAIC reporting for Humana’s MA plans reveals a gross revenue from MA of $2.09 billion and whole MA revenues of $49.56 billion for an working margin of 4.2% in 2019. Including additional context, the general ROA for all publicly traded firms was reported to be 2.55% in 2019. The implication is that Humana’s ROA is excessive relative to the remainder of the S&P 500. The explanations for these variations might contain variation in market energy, accounting practices, or the remedy intangible capital. This means that neither margins nor ROA alone will present an entire evaluation of profitability.

Associated companies

One query that arises within the debate about whether or not the MLR is more likely to constrain overpayments is the diploma to which dad or mum firms of MA plans can enhance earnings by making use of proudly owning associated companies that aren’t topic to MLR rules. The implication is that earnings to the dad or mum firm might seem as prices in MLR stories for the MA enterprise. The “large 5” firms all have associated companies together with PBMs, post-acute suppliers, hospitals, and doctor practices, to call a couple of. In every case, the costs charged to the MA plan can have a fabric impact on the place earnings and prices seem. This creates potential to maneuver earnings exterior the attain of rules.

The potential for such habits is illustrated by analyzing the expertise of Kaiser MA plans. Kaiser’s full vertically built-in construction highlights the position of associated companies within the accounts of plans and dad or mum firms. Kaiser Permanente is the dad or mum firm to well being plans, doctor practices, and hospitals. In line with the 2019 annual report, Kaiser had $84.5 billion in revenues in 2019, internet earnings of $7.4 billion, and working earnings of $2.7 billion throughout all strains of enterprise. The NAIC filings for MA in 2019 present $5.39 billion in revenues for 2019 that touches a number of plans throughout the nation. The expenditures are reported at $5.42 billion. Thus, earnings have been -$24.6 million for an working margin of -0.5%.  To interpret these kinds of information requires acquiring info on inside switch costs between the Kaiser Well being Plan and the associated entities owned by the identical dad or mum firm. The 2019 Type 990 filed by Kaiser stories $15.47 billion in Medicare revenues and whole revenues of $62.24 billion. The Type 990 stories expenditures of roughly $61 billion. Of that whole, almost $39.6 billion was accounted for by contractual funds. The dad or mum Kaiser Basis Well being Plan lists 5 unbiased contractors: Kaiser Basis Hospitals, The Permanente Medical Group, Southern California Permanente Medical group, Hawaii Permanente Medical Group, and Easterseals of Southern California. 4 of the 5 unbiased contracts are owned by the dad or mum firm that owns the Kaiser Basis Well being Plan. The 4 firms owned by the Kaiser dad or mum firm account for $43.34 billion {dollars} or 71% of expenditures by the well being plan. Thus, there are important components of the Kaiser Permanente group whose revenues seem as prices in MLR reporting. For instance, Kaiser hospitals accounted for $20.3 billion in spending by the Kaiser Basis Well being Plan. The Kaiser Basis Hospitals had whole revenues from all sources of $30.4 billion in 2019 and gross earnings of $3.73 billion. Thus, there are substantial transactions between the MA plans and hospitals owned by the dad or mum firm and subsequently alternatives for internet revenues to the dad or mum firm to be handled as prices to the well being plans that glad MLR necessities.


Most MA enrollees are served by MA plans which might be giant insurers that promote insurance coverage to a number of markets and which have a number of associated and unrelated companies. The associated companies can account from about 20% of spending to as a lot as 71%. The implication is that for the well being plans serving most MA beneficiaries, associated companies supply a chance for pricing practices inside the dad or mum agency umbrella that may defend earnings from the phrases of MLR rules. The extent to which dad or mum firms interact in such practices is but unknown. The potential to interact in such practices places smaller plans with out associated companies at a aggressive drawback. What is obvious is that CMS steering on switch costs and monitoring of MLR reporting is sort of restricted. This may occasionally change sooner or later because the 2022 cost rules governing MA plans requires renewed efforts to observe reporting linked to MLR rules.

The Brookings Establishment is financed via the assist of a various array of foundations, firms, governments, people, in addition to an endowment. An inventory of donors might be present in our annual stories revealed on-line right here. The findings, interpretations, and conclusions on this report are solely these of its creator(s) and aren’t influenced by any donation.


[1] In apply, most medical expenditures that depend towards the MLR are claims for medical providers. Nonetheless, expenditures to enhance well being care high quality are additionally included, resembling providers meant to advertise wellness or forestall hospital readmission. Administrative prices and earnings do not depend in direction of assembly the MLR.

[2] For the needs of our evaluation, we exclude plans sponsored by life insurers and California HMO plans, which don’t file the supplemental kind with the NAIC that breaks out financials by line of enterprise.

[3] The precise MFA information product is the Operations by LOB dataset inside the Well being Protection Portal.



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